Natali Morris of MSNBC joins us to discuss how to turn your family into a profitable business.
Incorporate Your Family
The tax system is not set up to benefit the individual, it’s set up to benefit businesses. That’s why eleven companies on the S&P 500 who made profits last year paid less in income tax than you. How much less? Well, they paid nothing.
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If you want to get in on that, incorporate. Set up an LLC, S-Corp, whatever is the most appropriate for your situation. What if you don’t have a business? Well, you might and not realize it. Do you babysit, clean houses, mow lawns?
No? Well start! And incorporate your hobby, side hustle, however you term it, as a business. Remember what Adam Carroll told us in last week’s episode? The two biggest expenses in life are taxes and interest. Incorporating your family is one way to maximize those tax savings.
Teach Kids About Money
Children have established their ideas and habits about money by the age of seven! So the earlier you start teaching them about money, the better. For the most part, many of us can afford to give our kids almost anything they want, at least when their they’re little. We can afford the stuffed animals and the action figures.
That’s why it’s important to put a system in place to help them understand what money is and how it works.
Natali gives her children an allowance but not in the traditional sense. Each kid has responsibilities that come with being part of a family; keeping communal areas and their own rooms clean.
Taking care of their possessions. If she wants them to do work for her, washing her car for example, they are paid for those kinds of things.
The kids also have real jobs, things like helping Mom scan and then shred documents, that pay them from the family’s LLC and they pay taxes on those earnings. Because the money is taxed, it’s eligible for an IRA and that’s where it goes. The IRA’s are Roth which means they only pay taxes on them during the years they contribute.
The children are given three, clear glass jars. The clear part is important, it lets kids see the money accumulating, something they won’t get using a traditional “piggy bank. “The jars are “give,” “save,” and “spend.”
The kids can buy whatever they want with the spend jar money, even if Mom knows they’ll lose interest in five minutes. It teaches that once the money is spent, it’s gone, so make it count.
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Self Directed IRA
A self-directed IRA is a retirement account that gives you control over your investment choices. You’re not limited to stocks, bonds, or mutual funds. This allows you to invest in alternative assets like real estate, limited partnerships, and gold through your self-directed retirement account.
These IRA’s are more work than the average IRA but the advantages can outweigh that for some. Natali buys rental property through her IRA, the proceeds come back into it and all expenses, property management fees, repairs, utilities, are paid out of it. There are yearly fees for this kind of investment which can be paid from within the IRA which is another tax deduction, or paid separately.
Finding Real Estate
Like our contributor Allison Karrels, Natali is a big believer in rental properties as investment vehicles. Natali owns nine properties and has never seen any of them. She uses wholesalers to find properties that are not on the open market.
One investor finds properties that would not do well in the regular real estate market and sells it to another investor, usually for cash. Buying this way allows you to buy at deeply discounted prices. Like Allison, Natali’s properties are handled by a property management company so there is no day to day hands on work involved.
Get The Goose, Not The Eggs
Conventional wisdom tells us to build up our nest egg. But having the nesting goose is better. Money depreciates, investments sometimes perform poorly, taxes aren’t going away. These things all chip away at your nest egg.
Your nest goose is an asset that makes money for as long as you own it. Rental properties, buy or invest in a small business. Find things that create a stream of income.
Borrowing Against A 401(k)
Natali took some heat when she wrote about borrowing against a 401(k) to buy a rental property. But doing so allowed her to purchase the property free and clear and that house now generates $800 a month in income and the loan has been paid back.
If your job is secure and you have either high-interest debt to pay off or a good investment opportunity like Natali’s rental property, borrowing against your 401(k) can be a good strategy. No one is saying it’s a good strategy for everyone but it’s not something that should be completely disregarded either.
How To Write Off Date Nights
If you set your family up as a business, you can write off those romantic nights out! Some of them anyway, don’t get greedy. You do need to legitimately discuss business on your night out and document it with notes and receipts.
Travel expenses can be written off too. Traveling to check on a rental property is a deductible expense so buy at least one somewhere you like to visit!
The Family Business
This phrase doesn’t mean what it used to, a brick and mortar business. Now it can be something online or what you spend your weekends doing. And you can get the entire family involved, Natali’s children are three and five and they already have IRA’s! So look into ways to set your family up as a business.
2XMAS: An ale from Southern Tier flavored with figs, orange peel, and spice.
Natali Morris: Natali’s site devoted to personal finance. Really, check it out. It’s a great site and I spent a couple of hours on there one day. Tons of useful information.
LMM Community: Join the money revolution! You’ll get exclusive access to our two new podcasts, Ask Anything and Rich Tips.
The Opposite of Spoiled: Raising children to be generous and financially savvy.
Hold: Growing real estate wealth.
Profit First: How to turn any business into a money maker.
Featured Image Photo Credit: “Business Baby Pointing” by Paul Inkles on Flickr